blair robert_final thesis

UNIVERSITY OF MAURITIUS/MIBS
2012
Affordability of a Universal Social
Pension in Rwanda
“A Thesis as a fulfillment for the award of Master
of Science Degree in social protection financing”
Blair Robert Ayesiga
S U P E R V I S O R : M R . A N T H O N Y H O D G E S

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Contents
Chapter 1: INTRODUCTION.........................................................................................................................13
1.0 Problem Statement...........................................................................................................................15
1.1 Research Question............................................................................................................................15
1.2 Research Sub-Questions ...................................................................................................................15
1.3 Division of the Study.........................................................................................................................15
Chapter 2 LITERATURE REVIEW ..................................................................................................................16
2.1 The Sustainability of a Universal Social Pension...............................................................................18
2.2 Impacts on Poverty and Nutrition.....................................................................................................18
2.3 Impacts on Health and Education.....................................................................................................19
2.4 Impacts on Economic Growth...........................................................................................................19
2.5 Social Impacts ...................................................................................................................................21
2.6 Major Discussions and Misunderstandings Surrounding Cash Transfers.........................................21
2.6.1 Development or Dependency:...................................................................................................22
2.6.2 Affordability: ..............................................................................................................................23
2.6.3 Sustainability:.................................................................................................................................24
Chapter 3 METHODOLOGY .........................................................................................................................25
3.1 Benefit Level......................................................................................................................................25
3.2 Total Cost ..........................................................................................................................................26
3.2.1 Justification for Administration Costs........................................................................................27
3.2.2 Rationale for Setting the 65 Years as Eligibility for a Social Pension.........................................27
3.3 Affordability and Sustainability.........................................................................................................28
3.3.1 Three scenarios are used for projected GDP growth:................................................................28
3.3.2 Fiscal Space ................................................................................................................................28
3.4 Sources of Data and Information......................................................................................................31
Chapter 4 ANALYSIS AND INTERPRETATION...........................................................................................32
4.1 Determining the Benefit Level..........................................................................................................32
4.2 Projecting the Cost of a Universal Pension Social Pension...............................................................34
4.2.1 Projecting Administrative Costs.................................................................................................35
4.3 Affordability and Sustainability of a Universal Social Pension in Rwanda........................................36
4.4 Fiscal Space Analysis .........................................................................................................................38
Chapter 5 CONCLUSION AND RECOMMENDATIONS..................................................................................40

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5.1.0 Universal Social pension in Rwanda ..............................................................................................40
5.1.1 The Situation of the Rwandan Economy....................................................................................40
5.1.2 The Fiscal Sustainability of a Universal Social Pension ..................................................................41
5.2.0 Recommendations and Financing Mechanisms ............................................................................42
5.2.1 Expenditure Switching ...............................................................................................................42
5.2.2 Mobilize Domestic Revenue through Taxes...................................................................................43
5.2.3 Government Borrowing .................................................................................................................43
5.3 Conclusion of the Study ....................................................................................................................44
BIBLIOGRAPHY ........................................................................................................................................45

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LIST OF TABLES
Table 1: Benefit level and Replacement Ratios ................................................................... 33
Table 2: Projected population 65+ olds 2010-2022.............................................................. 34
Table 3 Projected cost of a universal pension including administrative costs in Rwanda
using 2006 Constant prices (65+ olds with an annual benefit level of 5200 Rwanda francs
per month) 2010-2022......................................................................................................... 35
Table 4 The table below shows how much in percentages, the universal social old age
pension would cost. It also shows that the cost of a universal social pension can be financed
from the Domestic government revenue in Rwanda........................................................... 38

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LIST OF FIGURES
Figure 1 Population projection for 65+ olds from 2010-2022 as percentage of total
population.................................................................................................................................... 34
Figure 2 Projected cost of a universal pension in Rwanda at Constant prices (65+ with an
annual benefit level of 62400 Rwanda francs) as per cent of GDP ........................................ 36
Figure 3 Budget Implications: Comparison of a pension cost to health and education
expenditure in the short term 2011-2013.................................................................................. 37

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ACKNOWLEDGEMENT
Though only my name appears on the cover of this Thesis, a great many people have contributed
to its production. I owe my gratitude to all those people who have made this work possible and
because of whom my graduate experience has been one that I will cherish forever.
My deepest gratitude is to my advisor, Mr. Anthony Hodges. I have been amazingly fortunate to
have an advisor who gave me the freedom to explore on my own and at the same time the
guidance to recover when my steps faltered. Anthony taught me how to question thoughts and
express ideas. His patience and support helped me overcome many crisis situations and finish
this Thesis. I hope that one day I would become as good an advisor to my students as Anthony
has been to me.
Dr. Franziska Gassmann is one of the best teachers that I have had in my life. She sets high
standards for her students and she encourages and guides them to meet those standards. She
introduced me to Design, Implementation and Management of Social cash transfer programs and
her teachings inspired me to work on this topic.
I am also indebted to the members of the Master of Science, Social protection financing class
2011-2012, with whom I have interacted during the course of my studies.
Many friends have helped me stay sane through this difficult year. Their support and care helped
me overcome setbacks and stay focused on my Master of Science course. I greatly value their
friendship and I deeply appreciate their belief in me and most importantly the experience we
shared.
Most importantly, none of this would have been possible without the love and patience of my
family; Ambassador Gideon Kayinamura, Hon. Agelina Muganza and to my lovely children Teta
Doreen and Ntwali Robert Jr. to whom this dissertation is dedicated.
Finally, I appreciate the financial support from my employer Rwanda Social Security Board.
God bless you

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Name: BLAIR ROBERT AYESIGA
Student ID: 1070075
Programme of Studies: Msc. Social Protection Financing
Module Code/Name:
Title of Project/Dissertation: Affordability of a Universal Social Pension in Rwanda
Name of Supervisor(s): Mr. Anthony Hodges
Declaration:
In accordance with the appropriate regulations, I hereby submit the above dissertation for examination and I
declare that:
(i) I have read and understood the sections on Plagiarism and Fabrication and Falsification of
Results found in the University‟s “General Information to Students” Handbook (20…./20….) and
certify that the dissertation embodies the results of my own work.
(ii) I have adhered to the „Harvard system of referencing‟ or a system acceptable as per “The University of
Mauritius Referencing Guide” for referencing, quotations and citations in my dissertation. Each
contribution to, and quotation in my dissertation from the work of other people has been attributed,
and has been cited and referenced.
(iii) I have not allowed and will not allow, anyone to copy my work with the intention of passing it off as
his or her own work.
(iv) I am aware that I may have to forfeit the certificate/diploma/degree in the event that plagiarism has
been detected after the award.
(v) Notwithstanding the supervision provided to me by the University of Mauritius, I warrant that any
alleged act(s) of plagiarism during my stay as registered student of the University of Mauritius is
entirely my own responsibility and the University of Mauritius and/or its employees shall under no
circumstances whatsoever be under any liability of any kind in respect of the aforesaid act(s) of
plagiarism.
Signature: Date:

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Abstract
Universal social pensions have been applauded in countries where it has been implemented to
have a significant impact in reducing poverty among the old people. But it has also received no
support in low income countries under the pretext of involving higher costs that these countries
can afford and sustain.
The study is mainly intended to ascertain whether a universal social pension can be affordable
and sustainable in a low income country like Rwanda. The study uses public finance data for
Rwanda and also identifies the benefit level that is adequate. Based on this benefit level the study
does a simulation of the costs of a universal social pension in Rwanda from the year 2010-2022.
The study finds strong evidence that Rwanda if introduced a universal social pension for old age
(65+ years), the cost would be less than 1 per cent of the Growth Domestic Product.
Rwanda would afford and sustain a universal social pension without donor support or public
borrowing by just keeping the levels of her tremendous economic growth and also increasing
domestic revenue mobilization. Rwanda can therefore afford funding a universal social pension
from domestic government revenue.

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List of Abbreviation
DECT: Dowa Emergency Cash transfer
DFID: Department for International Development
EICV: Enquête Intégrale sur les Conditions de Vie des ménages
GDP: Gross Domestic Product
GTZ: Deutsche Gesellschaft fuer Technische Zusammenarbeit
HIPC: Heavily Indebted Poor Countries
IDA: International Development Association
ILO: International Labour Organization
IMF: International Monetary Fund
MCDSS: Ministry of Community Development and Social Services
MDGs: Millennium Development Goals
MDRI: Multi-Lateral Debt Relief Initiative
NISR: National Institute of Statistics of Rwanda
OECD: Organization for Economic Co-operation and Development
PRSP: Poverty Reduction Strategy Paper
RWFR: Rwandese Francs
USD: United States Dollars
VAT: Value Added Tax
VUP: Vision Umurenge Programme

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Rwanda
Country Profile
The country of Rwanda is situated in central Africa immediately south of the equator between
1°4' and 2°51' south latitude and 28°63' and 30°54' east longitude. Its total area of 26,338 square
kilometers is bordered by Uganda to the north, Tanzania to the east, the Democratic Republic of
the Congo to the west, and Burundi to the south. Landlocked, Rwanda lies 1,200 kilometers from
the Indian Ocean and 2,000 kilometers from the Atlantic Ocean.
Rwanda forms part of the highlands of eastern and central Africa, with mountainous relief and an
average elevation of 1,700 meters. However, there are three distinct geographical regions.
Western and north-central Rwanda is made up of the mountains and foothills of the Congo-Nile
Divide, the Virunga volcano range, and the northern highlands. This region is characterized by
rugged mountains intercut by steep valleys, with elevations generally exceeding 2,000 meters.
The Divide itself rises to 3,000 meters at its highest point but is dwarfed by the volcano range,
whose highest peak, Kalisimbi, reaches 4,507 meters. The Congo-Nile Divide slopes westward
to Lake Kivu, which lies 1,460 meters above sea level in the Rift Valley trough. In Rwanda‘s
center, mountainous terrain gives way to the rolling hills that give the country its nickname,
―Land of a Thousand Hills.‖ Here the average elevation varies between 1,500 and 2,000 meters.
This area is also referred to as the central plateau. Further east lies a vast region known as the
―eastern plateaus,‖ where the hills level gradually into flat lowlands interspersed with a few hills
and lake-filled valleys. The elevation of this region generally falls below 1,500 meters.
Because of its elevation, Rwanda enjoys a temperate, sub-equatorial climate with average yearly
temperatures of around 18.5°C. The average annual rainfall is 1,250 millimeters and occurs in
two rainy seasons of differing lengths, alternating with one long and one short dry season. The
climate varies somewhat from region to region, depending on the altitude, the volcano range and
northern highlands being generally cooler and wetter, with average temperatures of 16°C, and
average rainfall of above 1,300 millimeters. The maximum rainfall is 1,600 millimeters, above
the Divide and the volcanic range. The hilly central region receives an average of between 1,000
and 1,300 millimeters of rain per year, while rainfall on the eastern plateau, whose climate is
relatively warmer and drier, generally falls below 1,000 millimeters and can be as low as 800
millimeters. Although Rwanda enjoys more or less constant temperatures, the climate is known

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to vary from year to year, with extreme variations in rainfall sometimes resulting in flooding or,
more often, drought. These extremes have a profound impact on agricultural production, which
sometimes falls into recession. Rwanda has a dense network of rivers and streams, draining into
the Congo River on the western slope of the Congo-Nile Divide, and into the Nile in the rest of
the country via the Akagera River, which receives all the streams of this watershed. Water
resources also include several lakes surrounded by wetlands.
Deforestation due primarily to land clearing for agricultural expansion has resulted in mostly
anthropic vegetation with only a few small areas of natural forestland (representing 7 percent of
the country) remaining on the Congo-Nile Divide and the slopes of the volcanic range.
There are now four geographically-based provinces (North, South, East, and West) and the City
of Kigali, these being further subdivided into 30 districts, 415 sectors, cells and, finally, villages
(Imidugudu). This report is based on the new administrative divisions (four provinces and the
City of Kigali).
Poverty in Rwanda
Rwanda has achieved good economic growth during the past decade. Between 2000 and 2010,
average annual real GDP growth was 8.6 percent, exceeding the EDPRS target of 7 percent.
However alongside this impressive growth, Rwanda has made only modest progress in reducing
poverty. Poverty rates reduced from 56.7 percent in 2005/6 to 44.9 percent in 2010/201.
Furthermore, extreme poverty has reduced from 37 to 24 per cent in the same period. This
implies that the number of poor in Rwanda has been reduced by an average of 2.4 per cent per
year in the last five years, which is the exceptional for Africa and comparable to China, Thailand
and Vietnam.
The challenge of high poverty levels is exacerbated by rising and high levels of inequality.
Inequality as measured by the Gini co-efficient fell from 0.52 in 2005/6 to 0.49 in 2010/11.
To put this in perspective, a Gini co-efficient of 0.49 is still regarded as high inequality: when
China reached this in 2000, it rapidly changed its policy from one focused only on economic
growth to ―growth with equity.‖ In the East African community, only Kenya has a higher level of
inequality. A key challenge with high and rising inequality is that not only does it reduce
economic growth it also reduces the impact that economic growth has on poverty reduction. It is
likely to lead to a reduction in social cohesion.

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Poverty in Rwanda is concentrated among certain groups. In the initial Ubudehe survey of the
mid-2000s, communities ranked the poorest and most vulnerable categories of the population as
―widows, landless, sick, the elderly and child-headed households.‖ These views are backed up by
statistical evidence, with Rwanda having a range of priority vulnerable categories of the
population, as set out below.
Households with older people aged above 65 years are one of the poorest groups in the country
(EDPRS, 2007). They have a poverty rate 5.7 percent higher than the national. Indeed, 79.1 per
cent of these households could be regarded as poor or vulnerable to falling into poverty.
EDPRS (2007) found that, an estimated 328,000 people over 65 years of age, but only 24,300
(7.4 percent) have access to a pension from the Social Security Fund for Rwanda (SSFR). Older
people suffer from increasing social exclusion and many have to take care of orphans and
children of migrants at a time in their lives when they would be expected to be taken care of
themselves. These households – and their children – are particularly vulnerable in the absence of
assistance from government.

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Chapter 1: INTRODUCTION
Older men and women have played important roles in Rwandan society and continue to
contribute in diverse and dynamic ways at household, community and national levels. They have
contributed to the national economy both directly and indirectly throughout their lives with
others continuing to work well into old age (ILO, 2008).
Older people‘s income tends to be pooled and is invested in the development of younger
generations.
Although the majorities of older people live in rural areas and work in the informal sector, it is
also important to recognize that the majority continue to contribute to general tax revenue
through consumption taxes on goods.
At the household level older men and women play an increasingly important role in the future
human capital development of the country. In the first instance, older people have always
engaged in unpaid care work particularly looking after children – for their families and, in doing
so, have supported increased household productivity and human capital development. However,
in recent times older people are increasingly taking on full-time caring roles. In this respect
older people are the key to the future prospects of millions of children. Moreover, the fact that
the informal networks of support continue to change is increasingly leaving older women as
primary carers for pre-school age children. The economics of survival force younger generations
to make difficult decisions to support themselves and their families and as Rwandan society
becomes increasingly fragmented, older people increasingly serve as ‗the base‘ for the wider
family. Older peoples‘ contribution is felt most keenly at the community level. Accounts from
village councilors and committee members described how older people play a vital role in
maintaining moral standards amongst younger generations. They are also considered the
custodians of culture and history and play a significant role in promoting social cohesion through
conflict resolution. Older people, particularly older men, have vast experience of mediating inter-
household tensions. Their memories of debts and repayments as well as complex kinship
relationships are vital for the social fabric of the community, which relies on a level of social
reciprocity (Freedman, Jim. & Nyabingi, 1984). Older women support the extended household
and others in the community through caring for young babies and children to enable women to
engage in productive activities. Finally, it is important to remember that older people are not a
homogenous group and that old age is not defined by a single set of finite capabilities. Men and

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women after 60 are likely to experience changing roles and responsibilities in line with changes
in their own abilities and environments. Whereas the productive capacity of women and men in
their early 60s is unlikely to have deteriorated dramatically in comparison with their capacity in
their late 50s, people in their 70s and 80s are likely to contribute less in the way of household
income while remaining an anchor for the family unit. Both monetary and in-kind contributions
are an important part of later life in Rwanda that support society at all levels.
A universal social pension refers to all incomes given to older person regardless of their socio-
economic status (Global Action on Aging, 2007).
The luck of secure income in old age is one of the biggest challenges facing people in developing
countries. Few people in poverty can afford to save for older age and family support for older
people is under increasing pressure. The majority of older people lack a secure income, and
fewer than one in five people over 60 receive pension. The best way to tackle this problem is for
governments to provide non-contributory social pensions (UN-DESA., 2007, World economic
and Social Survey 2007).
In Rwanda the majority of the elderly people are found in the informal sector. These are sectors
that are excluded from the old age pension due to not having contributed towards their retirement
(Ministry of Finance and economic planning Rwanda, 2009).
Therefore social pension would be a valuable and strategic element of a minimum social security
package that supports the realization of rights, via implementation of the right to social security
for all and furthering state provision of social protection for vulnerable people.
The benefits of a social pension on older people, their families and the economy are increasingly
recognized. These impacts are particularly significant for social pensions with a wide coverage;
however, the cost of such schemes is not small.
The study will look at the key factors that determine the affordability of a universal social
pension; the study will not go into the impact and sustainability of a Universal social pension due
to the limited time and access to data.

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1.0 Problem Statement
In the Rwanda society children are socially obliged to look after their older ones as the way of
protecting them from shocks, during the 1994 genocide most families lost their relatives, older
people who managed to escape the tragedy lost most of their young ones, they were left on their
own these are people who cannot work because of their age but they need to survive, they need a
secure income.
Yes, after 1994 genocide very many vulnerable groups emerged and the government had to
prioritize which groups it would lay more focus on and inevitably, it focused on orphans and
widows than on the old people. This is why it is difficult to find the old people mentioned as a
group with policies towards them in the poverty reduction strategy paper (PRSP) according to
United Nations on Aging (2003). This study looks at universal social pension as a means of
helping the aged to have a secure income to help them come out and even help them resist falling
into poverty.
Therefore this study intends to answer the following question.
1.1 Research Question
1. Would a universal social pension in Rwanda be affordable and sustainable?
1.2 Research Sub-Questions
1. What would be a suitable benefit level for a universal social pension in Rwanda?
2. How much would a universal social pension cost?
3. Would it be affordable and sustainable in the long?
1.3 Division of the Study
After this Introduction chapter II explains the Literature review which concentrates much
on universal social pensions and financial sustainability, impacts on the society and the
economy and development; Chapter III explains the methodology used in the work;
Chapter IV focuses on the analysis and results; Chapter V focuses on the fiscal space,
recommendations and conclusion of the work.

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Chapter 2 LITERATURE REVIEW
In low income countries, most social security programmes are financed predominantly on the
basis of contributions. The majority of these contributory programmes are social insurance
schemes with a small number of declining number of operating the national provident fund
model. Typically, in their most basic form, national provident funds provide lump sum benefits
that equate to total employee and employer contributions, plus accrued interest. The benefits
provided under national provident fund usually cover the contingencies of old age, permanent
disability, and survivorship. Social insurance schemes in developing countries usually provide
earnings related defined benefits to insure against loss of income resulting from old age,
temporary or permanent occupational and non-occupational disability, and survivorship. Some
low income countries social insurance schemes provide the sickness and maternity and family
benefits. Further cash benefits such as severance pay- and also sickness and, maternity benefits
when these are not mandated under social security legislation- are commonly provided under the
statutory aegis of national labour code ( Canagarajah and Sethuraman, 2001, p.7).
In both the social insurance and national provident funds contributory models, stable patterns of
formal employment are normally necessary for coverage a priori. Yet, for the ,majority in many
developing countries, not only have stable patterns of formal economy employment failed to
materialize as was once deterministically assumed would be the case. But in many instances
formal economy employment has actually declined. For example, throughout the course of the
1980s and 1990s it has been estimated that informal economy employment as a percentage of
non-agricultural employment has increased in most of sub-Saharan Africa from 66.5% to 73.7%
(Charmes, 2000, p.63, adopted from table 1). A significant contributory factor to the decline in
levels of formal economy employment observed across much of developing world has been the
impact of policies of structural adjustment, which have provoked retrenchment and failed to
encourage employment creation in the formal economy. As witnessed most drastically by the
case of Africa, during 1990s `informal economy accounted for over 90 percent of new urban
Jobs` (ILO, 1999, P. 4). Declining levels of formal economy employment have, in turn, been
further detrimental to, often already low, levels of social security coverage. To make matters
worse, national coverage figures, when they are available, often understate the true scale of the

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problem in the total number of active contributors is often even lower than the published figures
of registered members suggest.
Globally at the end of 1998, the international labour organization (ILO) estimated that around
one billion workers, or one-third of the world‘s labour force, were either ‗unemployed or
underemployed‘ (ILO, 2000, p.147, citing ILO 1998). The vast majority of these one billion
workers-variably estimated at between 750 million and 900 million individuals-are thought to be
‗underemployed in informal economy activity. In, addition, these estimated figures do not take
into account the family members and other dependants of these unemployed and underemployed
workers. As such and when viewed in global terms, it is estimated that only a small minority of
world‘s population enjoy coverage under either contributory or non contributory social security
mechanisms.
According to Van Ginneken (2003) more than a half of the world‘s population is excluded from
any type of statutory social security protection. They tend to be part of the informal economy,
and are outside the scope of contribution-based social insurance schemes or tax-financed social
benefits. In low-income countries, such as Sub-Saharan Africa and South Asia, more than 90 per
cent of the population is generally not covered, while in middle income countries this percentage
to range between 20 and 60 per cent. It is estimated that worldwide only 20 percent of the
population‘s enjoy adequate social security.
Compounding the often shared coverage problems of developing countries arising from
administrative shortcomings and general macro-economic malaise, the potential for improving
coverage rates is often limited by social security legislation. The constraining impact of existing
social security legislation on coverage is often as much reflective of historical legacy as it is
shaped by practical administrative considerations. In majority of countries, the `self-employed‘,
who often significant and growing element in the overall national labour force of low income
countries, and an often large number of employees of very small enterprises, are commonly
statutorily excluded from membership of contributory social security, sometimes, the formal self
employed are permitted voluntary affiliation, but only if capable of paying the combined
equivalent of the employer and employee contributions. In general social security coverage for
those deemed to be engaged in a typical work is usually restricted to a limited number of

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benefits. In Rwanda for example `casual workers are covered only for old age, disability and
survivor benefits.
2.1 The Sustainability of a Universal Social Pension
Governments in Sub-Saharan Africa are naturally concerned about the financial implications of
introducing social protection programes against a context of high poverty incidence and limited
fiscal space, countries that have introduced a universal pension programs are mostly found in the
Southern Africa and of which are already middle inome countries. International labour
organization has undertaken detailed simulations across a range of countries in the Sub-Saharan
Africa with varying fiscal capacity and macro economic conditions, of the budgetary allocations
required for interventions (Behrendt, 2008). It concludes that well designed programs directed at
older people could be affordable in all countries. Very roughly, their simulation suggests that 1%
of gross domestic product (GDP) could be sufficient to cover the basic pension. The low cost of
a universal pension in Sub-Saharan Africa might be mainly attributed to small number of the
aged compared to developed countries.
Even if the basic pension of 1% gross domestic product (GDP) is adopted, it would be hard to
achieve in situations where the room for redistribution and the government tax collection
capacity are very limited.
2.2 Impacts on Poverty and Nutrition
Social pensions have had a significant impact in reducing the poverty gap; for example in South
Africa cash transfers has reduced the poverty gap by 48 percent (Samson et al., 2004). Mauritius,
households with older people have had their poverty rates reduced from 30 percent to only 6
percent as a result of old age grant Kaniki, (2007). Across Africa cash transfers have impacted on
food consumption. In Lesotho, the old age grant has resulted in an increase in the number of
older people reporting that they never go hungry from 19 percent to 48 percent (Croone and
Nyanguru, 2007). in South Africa, children who live with recipients of old age grant are up to 3.5
centimetres taller than children who do not (Aguero, Goddard and Wooland, 2006),
Demonstrating that grandparents use their cash to care for children. Indeed, in Namibia, older
people spend 70 percent of their from old age grant on others, mainly children (Devereux, 2001).

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2.3 Impacts on Health and Education
Investing in health and education services and reducing their cost is clearly essential, but it is not
sufficient if countries want to maximize impacts on health and education outcomes. It is also
important to directly tackle poverty.
Cash transfer programmes across Africa have made significant impacts on school enrolment and
attendance. For example, Zambia‘s Kalomo pilot programme-which mainly benefits households
headed by older people-has resulted in a 16 percent increase in attendance (MCDSS/GTZ, 2005).
In Lesotho recipients of old age grant spend a significant proportion of their grant on uniforms,
books and stationery for their grandchildren. And, in Malawi‘s Mchinji programme cash grant,
compared to only 14 percent in a control group Miller et al. (2009). In Namibia, 15 percent of the
cash from old age grant is spent on healthcare, including for children Devereux (2001). And in
Zambia, the incidence of illness among beneficiaries of the Kalomo cash transfer programme
reduced from 43 percent to 35 percent.
Social cash transfers promote human capital development, improving worker health and
education and raising labour productivity Studies in South Africa and Latin America repeatedly
document significant responses of health and education outcomes to both conditional and
unconditional programmes (Adato, 2007; Olinto, 2004; Samson et al., 2004, 2007).
2.4 Impacts on Economic Growth
There is increasing evidence from within Africa on the impact that social pension or cash
transfer programmes can have on economy growth, both by supporting investments by
beneficiaries and stimulating markets. In Rwanda itself the VUP (vision 2020 umurenge)
programme has demonstrated that recipients of cash transfer programmes invest in productive
assets, including livestock and farms (Devereux and Ndejuru, 2009).
In Zambia, beneficiary households of the Kolomo cash transfer programme have increased their
ownership of goats from 8.5 percent to 42 percent. There has also been a four-fold increase in
investment activity and a doubling of the amount invested (Schuering, 2008). In Ethiopia, 15
percent of the recipients of the productive safety net programme have invested in farming and 8
percent have purchased livestock (Devereux et al., 2006).

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Social cash transfers mitigate risk and encourage investment. The downside of the riskiest and
yet most productive investments often threatens the poor with destitution. Social cash transfers
enable people to face these risks. For example, farmers protected by the Employment Guarantee
Scheme in Maharashtra, India, invest in higher yielding varieties than farmers in neighboring
states (DFID, 2005). Protection against the worst consequence of risk enables the poor to better
share in the benefits of growth.
Impacts from injecting cash into the economy have also been noticed. Study in Malawi
demonstrated how local businesses have been significantly strengthened by increased flow of
cash in the economy (Devereux, 2001).
Social cash transfers stimulate demand for local goods and services. In Zambia 80% of the social
transfers are spent on locally purchased goods, stimulating enterprises in rural areas. In South
Africa the redistribution of spending power from upper to lower income groups shifts the
composition of national expenditure from imports to local goods, increasing savings (by
improving the trade balance) and supporting economic growth (Samson et al., 2004). A social
account matrix analysis of the Dowa Emergency Cash Transfer (DECT) programme in Malawi
found multiplier impacts from the payments broadening benefits to the entire community (Davies
and Davis, 2007). In Namibia, the dependable spending power created by social pensions
supports the development of local markets and revitalises local economic activity (Cichon and
Knop, 2003). However, the macro-economic impact for any given country will depend on the
patterns of demand across income groups and the manner in which social transfers are financed.
Social cash transfers create gains for those otherwise disadvantaged by economic reforms,
helping to build stakeholder support for pro-poor growth strategies. The political economy of
reform requires combining policies to broaden the base of those who benefit from new economic
strategies. Cash transfer initiatives have compensated the poor for reduced price subsidies in
Mexico and Indonesia. Bolivia established a social pension with the proceeds from the
privatization of public enterprises. Nepal and Senegal are considering cash transfers as part of
broader economic reform strategies. Social cash transfers can increase the positive impact of
growth on poverty reduction.

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As Social cash transfers, universal social pension provide an important risk management tool for
the poor at three levels: reducing the poverty resulting from shocks (drought, floods, sudden food
price increases, and others), reducing vulnerability and strengthening coping mechanisms. Social
cash transfers reduce the impact of shocks on livelihoods nationally by stimulating overall
economic activity, and they protect households by reducing the impact of shocks on productive
assets. For example, economic shocks are less likely to force poor households to sell their
livestock – often their only productive asset – if social cash transfers help them cope with the
loss of income
At the household level transfers reduce the risk by providing the security of a guaranteed
minimum level of income. This better enables poor households to send children to school
because they afford for them not to be working, as well as afford fees, uniforms and other school
expenses. Social ash transfers provide coping mechanism for the least fortunate, supporting a
minimal level of subsistence.
2.5 Social Impacts
Social cash transfers help create an effective and secure state. When broadly based in a manner
accepted by communities, they build social cohesion and a sense of citizenship, and reduce
conflict. A safe and predictable environment is essential to encourage individuals, including
foreign investors, to work and invest. The social pension in Mauritius contributed to the social
cohesion necessary to support the transition from a vulnerable mono-crop economy with high
poverty rates into a high growth country with the lowest poverty rates in Africa (Roy and
Subramanian, 2001). Likewise, Botswana‘s social pension provides the government‘s most
effective mechanism for tackling poverty and supporting the social stability that encourages the
high investment rates required to drive Africa‘s fastest growing economy over the past three
decades.
2.6 Major Discussions and Misunderstandings Surrounding Cash Transfers
Decades of experience in some developing countries as well as robust impact assessments in
others demonstrate clear lessons. Social cash transfers have a substantial impact on reducing
poverty and vulnerability and promote human development. In many countries they are one of
the government‘s most effective tools for tackling poverty.

22
The open issues revolve more around operational questions rather than impact. The question is
how do you design appropriate programmes for a country‘s specific social and policy context?
What are the institutional and management arrangements required to most effectively deliver
social cash transfers to the old poor households? What systems and procedures work best?
While international lessons of experience have identified a number of good practices, there are
still a number of open questions. In particular, debates continue on a number of fronts,
particularly with respect to dependency, affordability, cash versus in-kind transfers,
sustainability and targeting.
2.6.1 Development or Dependency:
Policy-makers frequently raise the concern that social cash transfers will create ―dependency‖, a
vaguely defined term with strong emotional connotations. ―Dependency from the state is not
necessarily worse than being dependent on a rich relative or on begging the neighbors.‖
(Künnemann and Leonhard, 2008). A rights-based social cash transfer creates an entitlement that
replaces dependency with a reliable guarantee.
Importantly, an emerging evidence base suggests that social cash transfers support
developmental impacts that may help the aged lift themselves out of poverty. The concept of
dependency emerged from the heavily targeted social welfare programmes adopted by many
industrialized countries over the past several decades. Rigidly applied means tests sometimes
created welfare traps, undermining incentives to work. Dependency resulted more from the
targeting mechanism than the cash transfer. In addition, the size of payments in industrialized
countries - sometimes hundreds times the magnitude of developing country cash transfers -
contributed to negative work incentives.
To address this question in the developing country context, it is necessary to formulate a more
concrete definition of dependency. Dependency in the context of social cash transfers can be
defined as ―the choice by a social transfer recipient to forego a more sustaining livelihood due to
the receipt of the cash transfer.‖ (Samson et al, 2004) From this definition the argument that the
old have no choice and have nothing to forego can be brought forward to demonstrate the aged
indeed need cash transfers that can help them cope with risks associated with poverty.

23
2.6.2 Affordability:
Social transfer programmes can be expensive - South Africa invests over 3% of its national
income and more than 10% of government spending on its comprehensive system of social
grants. Other countries, however, implement important national programmes with less than half a
percent of national income. Affordability is multi-dimensional. At one level, it is largely a
matter of political will. The attempts by economists to scientifically measure fiscal capacity have
generally found that most of the differences across countries are explained by non-economic and
largely political factors (Tanzi, 1992; Nelwyn, 1985; van Niekerk, 2002). Social transfer
programmes are affordable in a broad range of low-income countries. Zambia‘s cash transfer
pilot – which provides the equivalent of USD 15 per month to 1 000 poor households could be
scaled up to the poorest 10% of the population for less than USD 32 million (0.36% of national
income and 1.3% of current government spending in 2006). In most of these countries, the
programmes could be funded for less than 5% of existing aid flows (OECD, 2009; Samson et al.,
2006).
At an economic level, however, many countries face real fiscal constraints in financing social
transfers. Understanding affordability requires information about both the static and dynamic
conditions of the national treasury, as well as the availability of international assistance and
credit. Affordability is both a short-term and long-term question. Using both domestic and
international sources, a country may be able to fund an ambitious social transfer programme
(Subbarao, 2003). Increasingly, the World Bank and the Inter-American Development Bank are
making loans to finance social transfer strategies, reflecting the emerging consensus regarding
the productive potential of social transfers (Samson et al., 2006).

24
2.6.3 Sustainability:
The sustainability of social cash transfers is the commitment and ability of government to
continue to deliver the programme for as long as it may be required - perhaps permanently. This
refers to a number of different dimensions. On one level, sustainability requires that the
government have access to and in fact mobilizes the level of resources required to finance the
programme. At a deeper level, sustainability requires that political commitment be sustained so
that policy-makers assign the priority required to maintain the programme. This depends in part
on the mix of political and economic costs and benefits, which in turn can affect affordability.
Cash transfer programmes can prove politically popular - as demonstrated in Brazil‘s presidential
election. While the political economy of cash transfers is complex, one major question centers on
the growth and development impact of social grants. The greater the growth impact, the more
affordable and politically desirable is the social cash transfer programme - and this has a positive
effect on sustainability.
Building political will is critical for sustainability. The old poor and excluded often cannot
mobilize effectively to their interests. Support to civil society organizations that represent the
poor can strengthen political will for social cash transfers. Civil society mobilization provided a
critical force supporting the tripling of social cash transfers in South Africa over the past seven
years. Likewise, the design of cash transfer programmes can broaden political support. More
universal benefit programmes can ally the middle classes with the poor and build political will
The dynamic impact of the programme on the economy can support the financing of the
programme in the long run. Effective social protection is often economically productive through
a number of transmission mechanisms, thus increasing the resource base available to a country
(DFID, 2005; Devereux et al., 2005; Samson et al., 2004). ―Putting money in the hands of the
poor can yield very high rates of return, partly because they use their assets so intensively and
partly because the cost of falling below a critical consumption level is so great, small amounts
can yield a high effective return.‖

25
Chapter 3 METHODOLOGY
This thesis has taken the form of a micro-simulation analysis and primarily relies on secondary
data.
The dependent variable is the affordability of a universal social pension for old people and the
explanatory variables are the number of beneficiaries, the benefit level, administrative costs and
fiscal indicators.
Affordability will depend on the cost, fiscal space, financing options and ultimately also on
political choices. The study will be limited to the cost and the fiscal space of a universal social
pension as a determinant of affordability in Rwanda.
The study will tackle the costs and then look at the fiscal space and financing options Rwanda
has. Not only the GDP also the government expenditures that Rwanda has, on what, and also the
government income, how would the government finance it (to say if it is affordable or not, where
can the government get the money to finance the scheme.
3.1 Benefit Level
When determining the benefit level the study takes into account the affordability of the benefit
level by the government of Rwanda, it also puts into considerations the acceptability by the
general public but also by the politicians and sustainable from the governments domestic
revenues.
The replacement ratio chosen reflects the idea of acceptability given the minimum contributory
pension that is place in Rwanda, giving benefits higher than the minimum contributory pension
in place would not be welcomed by non-beneficiaries. This is in the way of defining the
appropriate benefit level that has a balancing act, finding a level that is neither too high to
generate dependency nor too low to lack impact. If the benefit level is too small the programme
fails to achieve its objective, if the programme is too generous, it may have adverse
consequences, such as reducing work incentives or crowding out private transfers, which would
diminish or even outweigh its positive impacts.

26
Replacement ratio , this formula calculates the replacement ratios
that will be used to explain the transfer amount.
Schieber (2004) projects that for workers with no retirement plan, a replacement rate of around
70 percent would maintain preretirement living standards for those retiring at age 65, or slightly
over 60 percent for those retiring at age 60.
McGill and others (2005) extend Schieber‘s analysis, with similar conclusions. Some
recommendations for replacement rates have been made relative to measures other than final
earnings.
The poverty line in Rwanda is also put into considerations when determining the benefits level,
the study looks at a transfer that will have an impact on poverty.
The data used takes into account the inflation and tries to protect the value of the benefits; in this
case all the projections are made using the 2006 constant process as obtained from the
International monetary fund
3.2 Total Cost
The total cost of the universal social pension is calculated using the following formula;
 Total cost = Ct = Pt + At, where Ct = total cost in year t, Pt is the cost of pensions paid in
year t, and At = administration cost in year t.
Pension cost in any year is the benefit level or pension amount (p) multiplied by the number of
beneficiaries (Bt), that is to say Pt = pBt.
Administration cost = At = aCt
The figures for B (proportion of the population receiving the pension) are calculated using the
age-disaggregated data from the National institute of Statistics of Rwanda‘s population
projections (NISR, 2007). The pension level is calculated using estimations of GDP at constant
prices from the IMF, World Economic Outlook (September, 2011 edition).

27
For the cost in Rwandan francs, the level of transfer is in 2006 prices is multiplied by the number
of people in the eligible group (65+).
3.2.1 Justification for Administration Costs
World Bank indicates (Grosh et al, 2008, p. 391) that a figure of about 9% is about average for
cash transfers (of all kinds, not just pensions). Although social pensions are regarded as a
―simple‖ form of categorical transfer, not requiring complex targeting or follow-up of
conditionality, the study suggests 10% to avoid the risk of underestimating administrative costs,
which are often ―hidden‖ (for example payment through the Post Office or Banks).
Namibia in 1999 spent 15 per cent of the cost of pension on Service quality comes at a cost.
Higher operational expenses may reflect better services provided—more frequent and direct
communications with clients, faster processing of benefit claims, alternative payment methods,
and so on.
3.2.2 Rationale for Setting the 65 Years as Eligibility for a Social Pension
The age eligibility for the social pension has been set at 65 years with reference to the enforced
retirement age. Older people who receive pension are not expected to continue in employment
beyond the age of eligibility for the pension. The thesis also balances the desired impact on
poverty and social economic development with concerns for affordability. This is of course, in a
context where lower age thresholds correspond to a higher number of beneficiaries. The higher
threshold can be reduced over time as the socio-economic impacts of the scheme become
apparent and as increased fiscal resources become available.

28
3.3 Affordability and Sustainability
3.3.1 Three scenarios are used for projected GDP growth:
• High growth – 8.48 per cent per annum. This is an average of the annual GDP growth rates by
historical standards for the last 10 years between 2000 and 2010.
• Medium or ‘trend’ growth – 6.5 per cent per annum. This is an average of growth rates for
Projected by the IMF from 2010 to 2016
• Low growth – 4 per cent per annum. This is half of the trend growth for the last 10years. This
would be a very low rate of growth by historic standards, and even lower according to the rates
being predicted by the IMF for the coming years.
3.3.2 Fiscal Space
Fiscal space is a term that has recently become fashionable in the aid community. But what it
means is fuzzy. Sometimes, the concept has cropped up when governments have argued that
fiscal constraints should be relaxed to accommodate additional borrowing to finance projects.
The logic is that these projects create productive assets that pay for themselves over the long
term, thus creating the fiscal space that they need. But recently, the term has also been used by
advocates of higher health and education outlays who have argued that these expenditures will
eventually pay for themselves through higher returns to human capital (Heller, 2005). The
challenge of creating fiscal space is one that has always confronted governments and their
advisors, including international financial institutions like the IMF.
3.3.2.1 Defining Fiscal Space
What is fiscal space? It can be defined as room in a government´s budget that allows it to
provide resources for a desired purpose without jeopardizing the sustainability of its financial
position or the stability of the economy (Heller, 2005). The idea is that fiscal space must exist or
be created if extra resources are to be made available for worthwhile government spending. A
government can create fiscal space by raising taxes, securing outside grants, cutting lower
priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from
the banking system (and thereby expanding the money supply). But it must do this without
compromising macroeconomic stability and fiscal sustainability—making sure that it has the

29
capacity in the short term and the longer term to finance its desired expenditure programs as well
as to service its debt.
How can this be done? The government must ensure that the higher expenditure in the short
term, and any associated future expenditure—including any recurrent spending on operations and
maintenance required by an infrastructure investment, or by the establishment of a school or
hospital—can be financed from current and future revenues. If debt-financed, the expenditure
should be assessed by reference to its effects on the underlying growth rate and the country´s
revenue-generating capacity. The government needs to be sure, in particular, that increased
outlays in one worthwhile area—health, for example—will not ultimately crowd out productive
spending elsewhere (Heller, 2005).
According to Heller (2005), for developing and emerging market countries, fiscal space may
seem a more immediate issue than in advanced economies because there are more pressing needs
for expenditure today. But longer-term issues are also involved, even for lower-income
countries, because of the need to ensure that there will be room to respond to unanticipated fiscal
challenges. For example:
 Countries that receive significant flows of foreign resources for a specific sector (such as
health care) may, as a result of the associated expansion of the sector, face additional future
spending needs that may essentially preempt a share of the growth of future domestic
budgetary resources.
 Foreign resource inflows, such as aid, may hurt a country´s macroeconomic situation (for
example, by raising its real exchange rate and thus reducing its international competitiveness)
or cause excessive aid dependency, so that such inflows may need to be limited. A foreign-
financed expansion of a specific sector (for example, education) may then imply limits on the
magnitude of foreign resources available to other sectors.
 Resource inflows may finance a government activity, such as pension reform, that creates a
liability in the form of future payouts that are highly uncertain in magnitude and timing.

30
Reprioritizing expenditure. Curbing unproductive spending should be an important objective.
This may require cuts in subsidies or military outlays, wage restraint, or rationalization of
elements of the civil service (including by tackling the common problem of ghost workers). But
at the same time, productive spending needs to be protected: not spending enough on a sector
(say, health) can have damaging social effects and prove to be a false economy, raising future
spending requirements by weakening the sector so much that it would be costly and time
consuming to "rebuild" it.
Boosting efficiency. Other aims should be to streamline the implementation of programs, reduce
corruption, and improve governance. Donors can help by paring conditionality, eliminating aid-
tying, reducing administrative overheads, better coordinating spending in a sector, and reducing
the administrative overload imposed on the limited number of recipient country program
managers.
Raising revenue. For countries with low ratios of government revenue to GDP, broadening the
tax base and improving tax administration are likely to be important objectives. For low-income
countries, a tax ratio of 15 percent of GDP should be seen as a minimum objective.
Increasing borrowing. Given that domestic and foreign borrowing must be serviced and repaid,
policymakers need to evaluate whether the social return from the uses to which the borrowing is
put justifies the cost. Governments may choose to borrow without taking specific account of the
direct returns, but then must do so when assessing the overall sustainability of a program. Such
assessments typically weigh an economy´s prospective growth rate, potential for exports and
remittances, prospective interest rate environment, revenue elasticities, composition of existing
debt (in terms of interest rates, maturity, and currency of borrowing), and terms of new debt
being considered.
Monetary expansion. This is not a desirable option! A government´s borrowing from the
banking system should be driven by monetary policy objectives—namely, the creation of
sufficient liquidity to support an economy´s real growth, with no more than low inflation. Even if
a government were explicitly to rely on money creation to facilitate somewhat higher
government expenditure, there are clear limits, given the potential inflationary impact.

31
Securing more external grants. For many developing countries, this is increasingly feasible
given the global commitment to help countries reach the Millennium Development Goals
(MDGs). Grants can clearly provide more fiscal space than borrowing, where debt sustainability
considerations have to be taken into account even when loans are highly concessional. But only a
sustained and predictable flow of grants can create the potential for a scaling up of expenditure
that can be maintained, and reduce the uncertainty as to whether a grant is simply of a one-time
nature and countries will need to take account of the potential macroeconomic consequences in
terms of international competitiveness that may arise from a significant scaling up in absorption
of external resource inflows.
3.4 Sources of Data and Information
The following source provided the data required for the study;
 National institute of statistics: data on population projections 2010-2022.
 International Monetary Fund; data on GDP and Government revenue.
 World Bank: Data on general government expenditures, and poverty value and
Average wage for agricultural and non-agricultural labour in informal sector.
 Rwanda Social Security Board: Data on minimum contributory pension.
The exchange rate was obtained from the National bank of Rwanda website accessed on
3/01/2012.

32
Chapter 4 ANALYSIS AND INTERPRETATION
4.1 Determining the Benefit Level
The poverty line in Rwanda expressed in monetary terms is one hundred and eighteen thousand (118000
Rwandan Francs) per year equivalent to 9833 Rwandan Francs per month using 2006 prices, this is the
data that was used to determine the poverty line in Rwanda and is considered as the figure below which
one is considered as poor, Rwanda House hold survey report, (EICV2. 2006).
The average wage for Rwanda has been categorized into two; the average wage for agricultural labour
and average wage for non-agricultural labour. When determining the benefit level the study puts into
considerations;
 Poverty line
 Average minimum wage for agricultural labour and
 Average minimum wage for non-agricultural labour
In this case the benefit level was set on Minimum statutory pension of 5200 Rwandan francs
equivalent to 8.5USD per month. This figure has been chosen on grounds that the flat universal
social pension does not exceed the minimum contributory pension.
The current minimum contributory pension is set at 5200 Rwandan Francs per month for those
with 15 years (180months) of contributions (New State Law No 6/2006 of 03/22/2006,
determining the responsibilities and functioning of the social security fund of Rwanda).

33
TABLE 1: Benefit Level and Replacement Ratios
2006 (EICV2) daily
wages
MONTHLY INCOME
BENEFIT
LEVEL (MIN.
PENSION) REPLACEMENT
RATIOS
AVERAGE WAGE FOR
AGRICULTURAL LABOUR 277 8425 5200 62%
AVERAGE WAGE FOR NON-
AGRICULTURAL LABOUR
(INFORMAL SECTOR) 520 15817 5200 33%
Calculations based on data from
source:http://www.imf.org/external/pubs/ft/scr/2008/cr0890.pdf
The benefit level has to fit within its budgetary, administrative and political constraints, while
maximizing its outcomes for the beneficiaries. The poverty line is set at 9690 Rwandans francs
per month, providing 5200 Rwandan francs will promote the old poor to 54% of the national
poverty line.
The programme is meant to provide benefits up to a fraction of the poverty line, low levels below
the poverty line has limited utility, low benefits do not protect beneficiaries from poverty-that is
they are not cost effective and may not justify their administrative costs-that is, they are
inefficient.
The average wage for agricultural labour, the benefit level is equivalent to the minimum
contributory pension (5200 Rwandan Francs). This means a reasonable level, close to the norm
for the replacement ratio (for those working in the agricultural sector and) and which is 62% rate,
this is in the way of defining the appropriate benefit level that has a balancing act, finding a level
that is neither too high to generate dependency nor too low to lack impact. If the benefit level is
too small the programme fails to achieve its objective, if the programme is too generous, it may
have adverse consequences, such as reducing work incentives or crowding out private transfers,
which would diminish or even outweigh its positive impacts.

34
4.2 Projecting the Cost of a Universal Pension Social Pension
Table 2: Projected population 65+ olds 2010-2022
2010 2011 2012 2013 2014 2015 2016
248866.4
(2.3%)
250810.1
(2.3%)
254700.7
(2.3%)
261381.3
(2.3%)
270591.8
(2.3%)
281319.5
(2.3%)
293666.8
2.4%
2017 2018 2019 2020 2021 2022
306454.6
(2.4%)
321033.2
(2.4%)
336152.7
(2.5%)
354627.2
(2.5)
373808.1
(2.6%)
395191.2
(2.7%)
Calculations Based on National institute of statistics of Rwanda population projections 2007-2022.
The above is the presentation in absolute figures, while below figure presents population with 65
years and above (here referred to as the beneficiaries) as a per cent of total population of Rwanda
from 2010 to 2022, (NISR, projections).
Figure 1 Population projection for 65+ olds from 2010-2022 as percentage of total population
Based on National institute of statistics of Rwanda population projections 2007-2022.
From the above figure it can be seen that the population 65 years and above with very slow from
2010 to 2022 from 2.39 percent in 2010 to 2.7 percent in 2022 that is an increase of 0.31 percent.
2.10%
2.20%
2.30%
2.40%
2.50%
2.60%
2.70%
65+As%ofTotalpopulation
Years
Pop 65+ as % of total popn
Pop 65+ as % of total popn

35
The small proportion of the aged in Rwanda is mainly attributed to the 1994 genocide that
claimed more than one million people from April to July in only 100 days.
4.2.1 Projecting Administrative Costs
The study applies 10 % as the Administrative cost for the Universal social pension in Rwanda.
This cost is calculated by multiplying the pension cost with the 10%.
Table 3 Projected cost of a universal pension including administrative costs in Rwanda using
2006 Constant prices (65+ olds with an annual benefit level of 5200 Rwanda francs per
month) 2010-2022
Years Pension cost Administrative cost Total cost
2010 15487929600 1,548,792,960 17036722560
2011 15622713600 1,562,271,360 17184984960
2012 15893324429 1,589,332,443 17482656872
2013 16310193738 1,631,019,374 17941213112
2014 16884931378 1,688,493,138 18573424515
2015 17554336051 1,755,433,605 19309769656
2016 18324808944 1,832,480,894 20157289838
2017 19122766004 1,912,276,600 21035042605
2018 20032473627 2,003,247,363 22035720990
2019 20975928630 2,097,592,863 23073521493
2020 22128738952 2,212,873,895 24341612848
2021 23325623755 2,332,562,376 25658186131
2022 24659928446 2,465,992,845 27125921291

36
4.3 Affordability and Sustainability of a Universal Social Pension in Rwanda
Figure 2 Projected cost of a universal pension in Rwanda at Constant prices (65+ with an
annual benefit level of 62400 Rwanda francs) as per cent of GDP
High, Medium and Low scenarios.
As noted in the earlier in chapter three, three scenarios were selected for the purpose of
projecting the cost of a universal pension from 2010 to 2022. All the three scenarios the cost of a
pension starts from 0.76 per cent of GDP and slowly reduces to 0.42 high, 0.56 Medium and 0.72
per cent of GDP respectively in the year 2022.
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Cost(percentofGDP)
Years
Pension Cost as per cent of GDP 2010-2022
High
Medium
Low

37
Figure 3 Budget Implications: Comparison of a pension cost to health and education
expenditure in the short term 2011-2013
The total cost of a universal social pension including administration cost compared to other
social protection expenditures in Rwanda. In 2011 and 2012 the total costs of a universal social
pension including administrative costs is equivalent to 13 per cent of healthcare expenditure and
15 per cent in 2013. The Pension costs including administrative is equivalent to 9 per cent in
2011 and 10 percent in 2012 and 2013 respectively.
13% 13%
15%
9% 10% 10%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013
Pensioncostas%ofHealthcare&
Educationexpenditures
Years
Comparison to Education and Healthcare Expenditures
Total cost as % of healthcare
expenditure
Total cost as % of education
expenditure

38
4.4 Fiscal Space Analysis
Table 4 The table below shows how much in percentages, the universal social old age pension
would cost. It also shows that the cost of a universal social pension can be financed from
the Domestic government revenue in Rwanda.
Period
Growth in
domestic Gov't
revenue
Total Cost of
Universal Social
Pension
Total Cost of a Universal
Social Pension as
percentage of growth in
domestic gov't revenue
2010 175,495,847,920 17,036,722,560 10%
2011 128,501,885,862 17,184,984,960 13%
2012 52,647,776,788 17,482,656,872 33%
2013 253,251,736,663 17,941,213,112 7%
2014 106,917,402,866 18,573,424,515 17%
2015 102,329,459,951 19,309,769,656 19%
2016 120,991,614,722 20,157,289,838 17%
2017 120,991,614,722 21,035,042,605 17%
2018 120,991,614,722 22,035,720,990 18%
2019 120,991,614,722 23,073,521,493 19%
2020 120,991,614,722 24,341,612,848 20%
2021 120,991,614,722 25,658,186,131 21%
2022 120,991,614,722 27,125,921,291 22%
From the table above the universal social pension would cost only 10 per cent of the government
domestic revenues in 2010 and 13 per cent in 2011, in 2012 the cost would take a big share 33
per cent of the government revenue as seen on the table, this is because in 2012 there was slump
in the growth of domestic revenues from 20 per cent in 2011 to 6 per cent in 2012 (a reduction of
14 per cent).

39
Rwanda would afford a universal social pension for old age up to 2022, if the government
revenue continues to grow at the projected rate.
Sustainability: sustainability means that the government can fund the programme for a long-term
and in this study sustainability is attributed to the fact that the government can finance the
programme from its own resources without going into borrowing. As we have seen from the
table above the cost of a universal social pension in Rwanda would be sustainable from 2010 to
2022.

40
Chapter 5 CONCLUSION AND RECOMMENDATIONS
5.1.0 Universal Social pension in Rwanda
Since the potential for increased expenditure on social development is affected by wider macro-
economic issues, this section presents a brief overview of Rwanda‘s current economic condition
and future economic prospects followed by a discussion of the various financing options
available to policy makers.
5.1.1 The Situation of the Rwandan Economy
In recent years the Rwandan economy has performed very well as measured by standard macro-
economic indicators. Economic growth continued to record an impressive performance in period
2000-2010 real GDP growth averaged 8.4% (National Bank of Rwanda and IMF Rwanda Country
Report n° 12/15, January 2012). The IMF expects that real GDP growth will continue to be stable
for some time.
Rwanda experienced a high inflation rate compared to 2010, partly reflecting higher global food
and fuel prices. Inflation rate was 8.3 % in December 2011, and is expected not to exceed 7.5%
in 2012 despite a weak global economy. Measures have been taken by the Government in order
to reduce that inflation, notably by reducing fuel taxes. However, the National Bank of Rwanda
has been reluctant to increase interest rates in order to contain inflationary pressures, preferring
to support economic growth. Nonetheless, Rwanda continues to experience national budget
deficits in 2009 it stood at 0.80 and 1.60 per cent of GDP in 2010 respectively.
According to IDA and IMF debt analysis, (2011), the total national debt (domestic and external)
has reduced significantly in recent years – mainly as a result of the Multi-Lateral Debt Relief
Initiative (MDRI). Rwanda‘s external debt of the central government at the end of 2010 was
US$799 million (14.6 percent of GDP), including a small fraction of private debt which is
guaranteed by the central government (0.4 percent of GDP).
Domestic public debt (including the central government and the central bank) was RWf 288
billion (8.9 percent of GDP) at the end of 2010, of which nearly half (4.3 percent of GDP) were
short-term maturities.

41
Before Rwanda reached the HIPC Completion Point in April 2005 and received further relief
through the Multilateral Debt Relief Initiative in early 2006, debt ratios had been around 85
percent of GDP.
The primary fiscal balance (excluding grants) is projected to steadily improve partly on
account of stronger revenue collection, capturing gains from the broadening tax base and
increasing efficiency of tax administration. Revenue would increase by over 2 percentage points
of GDP over 2010-2016, to 15.4 percent of GDP, and continue to improve modestly thereafter.
The improvements in revenue mobilization over the medium term are premised primarily on
higher collection of income and VAT taxes, backed up by continued improvement in tax
administration, reduction in the size of the informal sector and modest tax reforms aimed at
simplifying the burden of taxation and broadening the tax base.
.
External grants are projected to gradually decline to normalcy in the medium term and would
continue to fall over the longer term as Rwanda reduces its aid dependency. External grants have
been scaled up in the past few years to help Rwanda cope with the effects of adverse external
shocks (such as the food and fuel crises). They peaked in 2010 at 13.6 percent of GDP.
5.1.2 The Fiscal Sustainability of a Universal Social Pension
The literature on the affordability of social protection mechanisms tends to rely on the concept of
fiscal space. This has been defined as the potential that exists within a government‘s budget for
providing financial resources for implementing a particular policy without jeopardizing the
sustainability of its financial position or the stability of the economy (Heller, 2005). An
assessment of the affordability of a particular expenditure item – such as implementing a social
pension – therefore involves establishing whether such space exists at present or could be
created, and whether this fiscal space could be sustained over the longer term. The fiscal
sustainability of a government‘s financial position therefore refers to whether a given fiscal
policy can be continued into the future without threatening government solvency (Chalk and
Hemming, 2000).

42
The extensive examination of Rwanda‘s fiscal space goes beyond the scope of this thesis, the
analysis of the cost and shown above, allows the study to make a picture of the affordability in
Rwanda. It is important to note that, as illustrated above a universal pension established in 2010
at a cost of around 1 per cent of GDP is highly likely to reduce as a proportion of GDP over the
longer-term due to the fact that the size of the older population is expected to grow at a far
slower rate than economic growth and government revenue projections. Indeed Rwanda is
several decades away from the demographic shift experienced in many industrialized economies
and, in the context of strong long-term economic growth forecasts, it therefore seems sensible to
conclude that introduction of a basic social pension scheme would not have a negative impact on
fiscal sustainability. On the contrary, as discussed in the literature review chapter two, a
universal pension would likely promote economic growth and development.
5.2.0 Recommendations and Financing Mechanisms
In light of the above discussion, the following section focuses on the short-to-medium term
potential for creating fiscal space for a pension costing in the order of 1 per cent of GDP through
one or more of the following strategies: reallocation of existing government spending (otherwise
known as expenditure switching); increased tax revenue; international grant funding; increased
government borrowing; or debt reduction. Although technically an option, seignorage (printing
money) is not seen as a credible solution and is therefore not discussed. The following section
presents some preliminary findings on each of these options and the associated advantages and
disadvantages of each.
5.2.1 Expenditure Switching
In many countries considering higher investment in social development, expenditure switching is
often the preferred option as it increases the efficiency of government expenditure and avoids
some of the disadvantages associated with other forms of financing. While a far more detailed
study would be required to identify potential opportunities for expenditure switching.

43
5.2.2 Mobilize Domestic Revenue through Taxes
Substantial progress is being made in elevating depressed tax revenues in Rwanda. Tax revenues
is expected to increase by 2 percentage points to 15.4 per cent of GDP from 2010 to 2016,
however due to the desire to broaden its tax base Rwanda has put in place tax collection reforms
in 2011/2012, it has introduced Electronic sales register for recording tax payers‘ transactions
and limit VAT evasion and help track potential tax payers. It is also conducting a study to
identify potential areas to widen the tax base and estimate the tax gap. Rwanda is expected to
introduce gambling and royalty (on mining) taxes in 2011/12. All these measures are meant to
increase the tax base.
The advantage of using taxation as a means of financing a universal pension is that current
taxpayers may be more willing to finance the scheme if the additional taxes are required
specifically for the universal pension (Willmore, 2007). If everyone is to benefit from a universal
pension it is important that the tax base is wide.
5.2.3 Government Borrowing
IDA and IMF debt analysis, (2011) as indicated before, the total national debt (domestic and
external) has reduced significantly in recent years – mainly as a result of the Multi-Lateral Debt
Relief Initiative (MDRI). Rwanda‘s external debt of the central government at the end of 2010
was US$799 million (14.6 percent of GDP), including a small fraction which is guaranteed by
the central government (0.4 percent of GDP).
Domestic public debt (including the central government and the central bank) was Rwanda
Francs 288 billion (8.9 percent of GDP) at the end of 2010, of which nearly half (4.3 percent of
GDP) were short-term maturities.
The government of Rwanda has clearly indicated the desire to reduce its debts and even more to
reduce dependency donor aid flows which are expected to decline from 11.7 percent of GDP to
8.5 percent of GDP in 2011-2012, therefore increased borrowing would likely be an unpopular,
and indeed unnecessary, option.

44
5.3 Conclusion of the Study
The study has demonstrated that a universal social pension could be affordable in Rwanda for the
equivalent of less than 1 per cent of GDP. It is possible to state that this cost will decrease up to
the year 2022 and would not impact on fiscal sustainability. Realistic options for creating fiscal
space for the pension include increasing domestic revenue. The study has indicated the ongoing
tax reforms in Rwanda that will increase the government revenue as a proportion of GDP hence
generating adequate funding from government revenue this is a clear and a realistic possibility.
Other Financing options may seem to come at a cost of which Rwandan government would not
welcome.
Therefore a universal social pension financed from domestic government revenue is affordable
and would not negatively impact on fiscal sustainability and would promote economic growth
and development.

45
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